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The Board of Education of v. the Property Tax Appeal Board and

June 28, 2011


Petition for Review of an Order of the Illinois Property Tax Appeal Board. No. 03-00470.001-I-3

The opinion of the court was delivered by: Justice Zenoff

JUSTICE ZENOFF delivered the judgment of the court, with opinion. Justices Schostok and Birkett concurred in the judgment and opinion.


Petitioners, the Board of Education of Meridian Community Unit School District No. 223 (school district) and the Ogle County Board of Review (BOR), appeal from the decision of respondent the Illinois Property Tax Appeal Board (PTAB) reducing the 2003 tax assessment for a parcel of land owned by respondent Onyx Orchard Landfill, Inc. (Onyx). We affirm.

The property at issue (instant landfill) is a sanitary landfill consisting of 333.78 acres located in Davis Junction, Illinois. The landfill is three rectangular parcels, identified by separate parcel identification numbers; however, only one parcel, consisting of 159.54 acres, is involved in this proceeding. As of January 1, 2003, the date of valuation, the Ogle County assessment on the parcel at issue was $2,501,240. The BOR increased the assessment to $8,633,000, and Onyx appealed to the PTAB, which, after an extensive evidentiary hearing, reduced the assessment to $3,321,000.

The record shows that the instant landfill was among a number of assets located throughout the United States that were subject to a federal divestiture order, the purpose of which was to establish viable competition in the waste disposal business. On March 31, 2000, the instant landfill was transferred from BFI Waste Systems of North America, Inc., to Onyx's parent company. Onyx owns and operates the instant landfill.

At the hearing before the PTAB, Onyx presented the testimony of two appraisers, both of whom opined as to the fair market value of the entire landfill, even though only one parcel was at issue. One appraiser calculated the market value at $10,660,000 and the other at $9,600,000. The school district, which had been allowed to intervene, presented evidence that the entire landfill had an estimated market value of $25,900,000. Below, we set forth only those facts necessary to an understanding of the issues in this appeal.

Michael J. Kelly, a real estate appraiser with 32 years' experience appraising commercial and industrial properties, including landfills, testified that the purpose of the Onyx appraisal was to determine the unencumbered fee-simple value of the instant landfill as of January 1, 2003. Kelly testified that, given that his assignment was to value the real estate only and that the landfill was a going concern, the cost approach was the best method to calculate the market value. According to Kelly, the use of the income-capitalization approach to determine reliable market data, even assuming one could obtain valid arm's-length royalty agreements (leases between landfill owners and operators), would entail too many adjustments to the income stream to provide a reliable value for the real estate only. Kelly also rejected the sales-comparison approach because the sale of an operating landfill is of the going concern and thus the approach necessitates significant adjustments, such as excluding elements of business value that contribute to the sale price. Kelly questioned the reliability of any figure reached using the sales-comparison method. As a result, Kelly decided to use only the cost approach.

Onyx's Appraisals

Using this method, he determined that the value of the instant landfill was $10,660,000. He arrived at this number by first determining the value of the land as though it were vacant. By looking at recent sales of agricultural properties in Ogle County, Kelly concluded that the land's value was $4,000 per acre. He then calculated the replacement cost for the improvements on the property, which totaled $2,618,000. He then determined that the cost of cell liners for the developed portion of the landfill was $19,150,000, to which he applied a depreciation factor because the landfill had reached 63% of its permitted capacity as of January 1, 2003. Factoring in depreciation reduced the value of the cell liners to $7,472,290. Kelly then depreciated the value of improvements other than the cell liners and came to a total of $2,036,500. When he added the value of the land, the improvements, and the cell liners, he came to a total of $10,658,790, which he rounded to $10,660,000.

Douglas Main was Onyx's second appraiser. He specialized in waste and the waste industry, having directed for five years PriceWaterhouseCoopers' Waste Group, a national practice providing advisory consulting services to the waste management industry. Prior to working for PriceWaterhouseCoopers, Main owned his own company called Landfill Valuation of America. Main testified that his assignment in the present case was to value the real estate only and to exclude from his valuation the going-concern or whole-business value, which combines all the assets. Main searched for any sale of the instant landfill within three years of the valuation date in order to determine its market value, defined by an arm's-length transaction between unrelated parties without force or a specific reason to buy or sell. Onyx's purchase of the landfill did not meet the criteria for an arm's-length transaction, because it occurred under duress when the Department of Justice ordered the divestiture of the instant landfill as part of a portfolio of assets. Moreover, according to Main, price allocations for some of the assets in the portfolio sale had no relevance to market value because they were made for accounting purposes and were not reflective of the real estate only.

Main rejected the cost approach because it was not the best indicator of value, due to the difficulty in estimating the land value of such a large parcel and in defining accrued depreciation, and because the landfill was a wasting or depleting asset. Main also rejected the sales-comparison approach because most sales of landfills involve going-concern sales data, which include personal property and intangibles, and because many landfill sales are part of a portfolio acquisition. According to Main, because of the numerous adjustments required, the sales-comparison approach would not reflect market-participant behavior that focuses on the income-generating capability of the instant landfill. Therefore, Main applied the income approach in his appraisal.

In applying the income approach, Main relied on the market/royalty method in order to reflect the value of the real estate only. The market/royalty method essentially translates capitalization of future income attributable to the real estate into an estimate of the net present worth of the real estate. Main first calculated Onyx's tipping fee, which is the fee that Onyx would charge for dropping off waste at a landfill. Main estimated a net tipping fee of $18.50 per ton and then deducted $5 per ton for surcharges and host fees, which are collected and passed on to appropriate agencies. Thus, Main calculated Onyx's tipping fee at $13.50 per ton. He next calculated annual waste intake and multiplied it by the annual tipping fees to arrive at Onyx's annual income from tipping fees. Then Main examined leasing and royalty agreements for other operating landfills, and, after making appropriate adjustments, he determined that Onyx's market rent/royalty rate was 12%. By multiplying the market rent/royalty rate by the amount of annual tipping-fee income, adding miscellaneous income and subtracting miscellaneous administrative expenses, then applying an annual discount rate over the remaining life of the landfill, Main determined that the value of the instant landfill was $9,600,000.

The School District's Appraisal

The school district hired Michael McCann, who had approximately 23 years' experience appraising all types of waste disposal facilities, including sanitary landfills, to appraise the instant landfill. McCann's assignment was to appraise the fair market value of the instant landfill as of January 1, 2003, exclusive of any business or enterprise value. McCann also appraised not the individual parcel at issue, but the entire landfill as one whole economic unit. McCann considered all three approaches to determine the property's value, but he did not utilize the cost approach because, in his opinion, it was irrelevant because landfills are not bought or sold on a cost-approach basis. Rather, McCann utilized the sales-comparison and income approaches. In utilizing the sales-comparison approach, McCann reviewed numerous sales of landfill properties, including properties in northern Lake County, California, and Michigan. Under the sales-comparison approach, McCann appraised the instant landfill at $25,500,000. Utilizing the income approach, McCann appraised the instant landfill at $25,900,000. This figure was arrived at by multiplying waste intake volume by a tipping fee of $33 per ton with an increase of 2.3% per year for the life of the landfill. McCann selected the tipping fee from data contained in a 2002 report regarding tipping fees charged at 10 northern Illinois landfills.

The school district asked Mark Pomykacz, a real estate and business appraiser with over 20 years' experience to review the submitted appraisals for their reliability and credibility. Pomykacz found the Kelly and Main appraisals to be materially inconsistent, and he did not believe that they could be reconciled to determine a fair market value for the instant landfill. Pomykacz testified that the income that Main calculated in his appraisal was insufficient to support the cost that Kelly ascribed to the instant landfill. According to Pomykacz, if Onyx relied on the income as described in Main's appraisal, it would not construct the improvements described in Kelly's appraisal.

Onyx's Rebuttal

In rebuttal, Onyx presented the testimony of Jerry Jones, a real estate appraiser with 34 years' experience, including the appraisal of landfills. Jones reviewed the McCann appraisal. Jones testified that McCann's sales-comparison approach was flawed because all of the sales of landfills that McCann referenced were duress sales, not arm's-length transactions, and thus they did not reflect fair market value. According to Jones, the tipping fee that McCann used in his income approach was a "gate fee," the highest rate charged at a landfill for a one-time user, which did not take into account discounts that may be ...

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